Axis Bank raised a massive Rs12,500 crore though a qualified institutional placement (QIP), without breaking a sweat, and investors who made that happen deserve good news.
To make investors happy, the third largest private lender will have to show an improvement in asset quality and convince the market that its balance sheet growth will trump that of rivals.
Improving asset quality won’t be easy and that could make balance sheet growth a challenge too.
“The QIP is a positive for the bank and the funds would be obviously used for more provisioning and even growth," Suresh Ganapathy, analyst at Macquarie Capital Securities. “But asset quality is still unresolved and fresh stress has emerged," he added.
Moreover since they are de-risking their portfolio, margins are going to be under pressure. So there isn't much earnings upside for the stock to price in.
Axis Bank has exposure to a handful of stressed companies that have off late shown deeper troubles. Some of these are companies belonging to Anil Dhirubhai Ambani Group and Essel Group. Reliance Capital was downgraded to D recently and lenders are still haggling with Essel Group over payment.
Axis Bank also has exposure to real estate developers that were downgraded by rating agencies due to stress. Its exposure to small and medium enterprises (SME) stands at 12% and the increased stress on small businesses due to slowdown has added to the risk of this portfolio. Analysts at Macquarie have flagged this as a key risk to asset quality.
To be sure, the bank showed improvement in asset quality in the June quarter, reporting a 10% year-on-year drop in its bad loan stock. That said, the bank also reported an increase in fresh slippages which made investors uncomfortable.
Analysts believe that some of the newer stressed exposures are not included in the watchlist and so could throw a negative surprise for the lender.
To be fair, the bank’s new chief Amitabh Choudhury has made it clear that the lender will have enough insurance against fresh risk. It beefed up provisions and is likely to continue doing in the coming quarters as well.
That brings us back to the fact that if more money is set aside for provisions, there is less available for growth.
But the fact that the QIP money will increase its Tier-I capital by over 2 percentage points should bring some cheer to investors.
Also, much of the negatives seem to be priced into the stock, given that it is down 3.4% over the past two months despite the 10% rise post the corporate tax cut announcement by government on Friday.
“Our analysis shows the potential stress at Axis Bank is only marginally higher on corporate assets than at ICICI Bank, and given its underperformance, we believe it presents a good buying opportunity," analysts at Jefferies India Pvt Ltd wrote in a note.
Since the stock trades at a modest multiple of two times its estimated book value for FY21, analysts believe it is a good buy in comparison to its more expensive peers such as HDFC Bank and even ICICI Bank.